I recently remembered that I wrote up a post on Scully’s contribution to baseball economics last year. It was published at The Baseball Project, so I repost it below.
— — —Gratitude (for Gerald Scully)

Curt Flood is an important player in baseball history for his contribution to the current economic climate of major league baseball. Flood is famous for demanding higher wages for himself, and standing up to owners for not meeting his demands. Though he lost his court case, his discontent helped pave the way for the players union to successfully win concessions from owners (such as salary arbitration and free agency) that would boost the baseball player salaries.

Why should we celebrate this man, as The Baseball Project does? These people play a child’s game and make millions of dollars. Flood himself was no pauper—he turned down a $90,000 contract because he didn’t want to play for Philadelphia. Why should we feel sorry for any of these money-grubbing athletes?

The answer lies in the work of economist Gerald Scully. Using economic theory as a guide, Scully viewed Major League Baseball as a monopsonist employer—the sole buyer of a particular type of labor. Being the only organization that purchased major league baseball talent, players had little bargaining room to negotiate their pay. And MLB understood this, enforcing its reserve clause that required players to play for the team that they previously played for, or to play for no team at all. Scully understood that the impact of this relationship between teams and players meant that owners collected a large percentage of revenues that players generated by playing baseball.

Using estimates of team revenues and performance metrics (SLG for hitters and K/BB for pitchers) Scully estimated how much performance affected winning and how much winning affected revenues. Thus, he was able to generate a dollar-value estimate of the revenue that players generate. When he compared what players made to what the players actually earned, the difference was striking. Players earned 90-percent less than the revenue they generated through their play. This means that a player like Flood, who earned around $100,000 year was generating nearly $1 million in revenue. What was at stake was how this was shared between owners and players. It is easy to see why players were upset, owners were profiting from the low salaries of players.

The Andy Messersmith and Dave McNally cases in 1975 finally led to the repeal of the traditional reserve clause, and player wages rose accordingly. Now that players were no longer bound to a single team during free agency, teams compete for players and offer to pay them salaries commensurate with the revenues they expect players to generate.

Gerald Scully published his paper in 1974 in American Economic Review, and it most certainly had an impact on the atmosphere; although, I can’t say how much. In almost any history you read of about free agency, Scully doesn’t receive a mention. There is no doubt that once Scully’s conclusions were published that the reserve clause would soon fall. Either a rogue league would enter the market to pay players higher wages or the courts or Congress would finally be convinced of the damage being done to players.

Players earn high salaries because they possess unique skills that fans will pay to watch. While it is had to sympathize with the plight of wealthy players in their labor struggles with owners, it is important to understand that what players don’t get goes to the owners, who tend to be much wealthier than players.

Sunday, June 7th, 2009,
by JC and is filed under "General, People ".
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